Why you should start preparing and managing your taxes now

By Zina Kumok, personal finance writer

Tax Day doesn’t come until April 18, 2017, but that’s no reason to delay preparation. In January, you’ll receive your W2s, 1099s and the other necessary forms needed to file your taxes.

However, even with months of time, unfortunately, many people wait until the last minute to file their taxes, which results in stress, late forms and possibly missed deductions. The longer you wait to file, the more anxious the process will be.

Fortunately, there are plenty of things you can do now to get your taxes in order. Here’s what everyone can do to make sure that April 18 won’t be filled with panic and worry.

Get Organized

The first step before you begin your taxes is to get organized. This includes collecting receipts, proof for every deduction, and a list of your income sources. Contact anyone who might send you a W2 or 1099 to make sure they have your correct address and social security number.

CFP Therese R. Nicklas of The Wealth Coach for Women, Inc. also said to collect “tax-related receipts such as charitable giving, business expenses not covered by an employer, medical expenses.”

The IRS provides an in-depth checklist to ensure you have all the documents needed. Use a spreadsheet or paper system to list your deductions and income and scan the receipts so you have both digital and physical copies.

Make sure to send these to your accountant if you plan to use one; they can start working on your taxes now even before the official forms come in.

Find your system

There are a few ways you can file your taxes. You can hire an accountant, use a tax software, or do it yourself by hand.

According to the IRS, the number of people using tax software is increasing, with over 27 million taxpayers filing from home computers in 2014. Programs like TurboTax, Quicken, TaxAct and H&R Block make it simple for anyone to file their taxes without hiring a pricey accountant. Most of these programs cost between $45 and $200 depending on your needs.

The IRS also has free software available to anyone earning less than $62,000 a year. Assess your options and decide the system best suited for you now, so you won’t be scrambling in April. Many tax software companies offer free versions for those who only use a basic form. Some require that you earn less than a certain amount or fulfill other criteria to receive a free edition.

Accountant Eric Nisall of Accountlancer recommends having a person on standby in case you run into issues at the last minute. A real person can help you with questions that a software program won’t be able to answer.

“Always have a trusted accountant you can call in case you have questions or concerns,” he said.

Make last-minute contributions

Now’s the time to make any retirement or charitable contributions so you can deduct the proceeds on your taxes. Extra deductions can minimize your tax burden and ensure that you get a refund.

Financial planner Justin Chidester of Wealth Mode recommends a particular strategy that most Americans can take advantage of.

“If you are eligible for the earned income tax credit, then the most important thing you can do is extra 401k contributions,” he said. “Every dollar contributed to your 401k gets you a 20% return on your EIC refund. That means if you contribute $100 to a 401k, you will not only get a tax deduction (saving 10-15% on income taxes) but also potentially get over $20 more dollars in your refund.”

You can see if you’re eligible for the earned income tax credit by going to the IRS website. Most people eligible earn $53,505 or less and have at least one child. The maximum amount you can add to your 401k is $18,000 a year or $24,000 if you’re 50 or older.

Traditional IRA contributions will also save you money on taxes, and you can deposit as much as $5,500 in one year, or $6,500 if you’re 50 or older.

Health Savings Account or HSA contributions can also lower your taxable income, up to $3,350 per individual or $6,750 per family. These roll over from year to year so there’s no risk in losing that money.

Decide between itemized or standard deduction

Even if you can’t file taxes until January 19, you can decide now if you’re going to use the itemized or standard deduction. Not itemizing your deductions is one of the most expensive tax mistakes you can make.

In 2016, the standard deduction was $6,300 for individuals and $12,600 for married couples. The itemized deduction only has a limit for individuals earning more than $258,250 or married couples filing jointly earning more than $309,900.

In general, homeowners should always itemize, since they can deduct mortgage interest up to $100,000 for married couples and $50,000 for individuals.

Other people who might benefit more from itemized deductions are those who donate to charity, paid for expensive health care procedures, aren’t reimbursed for business expenses and anyone who suffered theft or loss that wasn’t reimbursed by insurance.

Itemizing your deduction is a painstaking process and much more complicated than taking the standard deduction, but it could also save you more money while you file your taxes.

If you decide to itemize, you should start collecting proof of all your deductions so filing your taxes will be easier once you’re ready.

Filing your taxes is an event that drives many to procrastinate until the last minute. Instead of freaking out, try to do a little bit of work on your taxes each week. Committing yourself to start early will help avoid the panic that comes when you procrastinate. If you start the process now, you’ll be in great shape come April 18.

Written on January 4, 2017

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